Aggregate Supply &
Aggregate Demand
Chapter 10-4 The Model
The AS–AD Model
The AS-AD model uses the aggregate supply curve and the
aggregate demand curve together to analyze economic
fluctuations.
The AS–AD Model
Short-Run Macroeconomic
Equilibrium
The economy is in short-run macroeconomic equilibrium
when the quantity of aggregate output supplied is equal to the
quantity demanded.
The short-run equilibrium aggregate price level is the
aggregate price level in the short-run macroeconomic equilibrium.
Short-run equilibrium aggregate output is the quantity of
aggregate output produced in the short-run macroeconomic
equilibrium.
Shifts of the SRAS Curve
Stagflation is the combination of inflation and falling
aggregate output.
Shifts of the SRAS Curve
Shifts of Aggregate Demand:
Short-Run Effects
Shifts of Aggregate Demand:
Short-Run Effects
Long-Run Macroeconomic
Equilibrium
The economy is in long-run macroeconomic equilibrium
when the point of short-run macroeconomic equilibrium is on the
long-run aggregate supply curve.
Equilibrium
Shock
Recessionary gap
Effects of a Positive Demand
Shock
Inflationary gap
Self-correcting Mechanism
In the long run the economy is self correcting: shocks
to aggregate demand do not affect aggregate output in
the long run.
Negative Supply Shocks
Negative Supply Shocks
Negative supply shocks pose a policy dilemma: a
policy that stabilizes aggregate output by increasing
aggregate demand will lead to inflation, but a policy that
stabilizes prices by reducing aggregate demand will
deepen the output slump.